As introduced, the upcoming biennial budget includes major cuts to large, state-funded programs as lawmakers contend with falling revenues from recent income tax cuts. Medicaid, as the second single largest appropriation in the budget, has become a prime target. Last year, the General Assembly formed the Medicaid Oversight and Advisory Board (MOAB) to review the program. And this year, the House has proposed several policies that would reduce enrollment and utilization through House Bill (HB) 2, along with over $800 million in Medicaid cuts in the initially-proposed budget.
To justify these cuts, lawmakers have asserted that state spending is ballooning and unsustainable. But a closer look at recent cost trends in Medicaid paints a different picture.
Medicaid provides health care for 1.4 million Kentuckians from cradle-to-grave and supports hundreds of thousands of jobs throughout the commonwealth. It is a vital resource for Kentuckians that should be protected, and it should not be cut based on misunderstanding about its costs.
Medicaid spending per-enrollee in Kentucky is in line with the rest of the country’s
State spending on Medicaid in Kentucky is driven by three things: the number of people enrolled, the federal share of spending and the cost of the care it covers. The first two – enrollment and the federal share of Medicaid spending – have been declining and stable respectively since the end of the pandemic-era coverage protections. This leaves the cost of care as the only change in spending in recent years. To understand how that has changed it is helpful to look at per-enrollee spending. That amount has risen in recent years, though largely in line with the national trend, according to National Health Expenditure Survey data.
Between 2010, the year the Affordable Care Act passed Congress, and 2019, spending on a per-enrollee basis remained stable. It wasn’t until 2020 that per-enrollee Medicaid spending began to climb in Kentucky and across the country. In addition to COVID-19 related increases in health care spending, this cost spike coincided with the advent of Kentucky’s State Directed Payment (SDP) programs which were enacted and expanded by the legislature. These programs provide supplemental payments, primarily to hospitals, to bolster their standard reimbursements which are very low compared to commercial insurance.
There are four SDPs in Kentucky, though by far the two largest are designed to pay university and private hospitals. Since 2020, they have grown from $929 million to just over $5 billion. As of fiscal year 2025, those SDPs represented just under a quarter of the total Medicaid budget. Without the state directed payments, Medicaid spending would have been generally stable since 2020.
Medicaid cost growth comes mainly from restricted agency and federal funds, not Kentucky General Funds
These payments, however, have been critical to many hospitals, particularly those most at financial risk from recent federal cuts, and have corrected for otherwise paltry Medicaid reimbursement rates without using state General Fund monies. One estimate showed that without SDPs, Medicaid reimbursements were 22% below Medicare rates, but with SDPs, Medicaid reimbursements were 6% higher than Medicare rates. Both Medicaid and Medicare rates are lower than commercial insurance reimbursement rates.
The state was able to provide these supplemental payments without using state General Fund monies because our SDPs are funded through taxes on health care providers, the revenues from which are then used to draw additional federal funds. Because of this, inflation-adjusted General Fund spending on Medicaid has grown slowly, while overall spending has risen.
In fact, between 2010 and 2025, only 11% of the total cost growth in Medicaid has come from the General Fund.
Last summer, H.R. 1 made deep cuts to how states can levy provider taxes and how they can provide SDPs. Because of these cuts, both agency and federal spending will begin to fall in 2028, regardless of what the General Assembly enacts through HB 2 or the state budget.
Policies that reduce enrollment won’t save much money in the short or long run
Despite the fact that Medicaid cost growth has almost entirely stemmed from restricted agency and federal funds, lawmakers are attempting to reduce General Fund spending on Medicaid in the upcoming biennium. Specifically, HB 2 includes many policies designed to reduce enrollment through increased paperwork among expansion enrollees – those eligible under the Affordable Care Act’s expansion of coverage to all adults under 138% of the federal poverty level regardless of their health condition.
However, the federal government’s share of spending for Medicaid expansion is 90%, compared to its share of the cost of everyone else on Medicaid, which is 72%. The higher match rate for expansion enrollees, and the fact that there are fewer expansion enrollees than traditionally-eligible enrollees, means reducing expansion enrollment will not be an effective cost-cutting measure for Kentucky.
Additionally, given the important role that Medicaid payments to providers play in Kentucky’s broader economy, moving to reduce expansion enrollment has an even more harmful economic effect than other kinds of budget cuts. Due to the federal government’s share of expansion costs, for every dollar the state cuts in expansion-based care, we forego nine dollars in federal funds spent throughout local economies.
Reducing coverage means fewer Kentuckians getting the care they need and additional associated costs that would undermine any savings potentially generated from lower enrollment. The Congressional Budget Office assumed that most people who lose Medicaid because of H.R. 1 will become uninsured. Because some of the Medicaid policies being proposed this session go beyond H.R. 1, the number of uninsured Kentuckians would likely grow even further. A long-term body of research points to increased financial hardship and poorer health outcomes for those who become uninsured. Should Kentucky’s uninsured population grow, it would likely also create more need for other forms of public assistance, and more care later on, when problem are more expensive to treat and difficult to cure.
